the Foreclosure Abuse Prevention Act (A7737B), recently signed into law by Governor Kathy Hochul, is transformative legislation which may cause the dismissal of thousands of pending foreclosures with prejudice
To the delight of court administrators, the changes will cause the permanent dismissal of thousands of foreclosures which have congested the civil docket over the past decade.
An article was recently published for the benefit of banks and their lawyers, who have been panicking over the New York State law aimed at eliminating illegal foreclosures. The writer is attempting to calm the panic that started when New York passed this law. It is entitled “A discussion of what next steps lenders should take in response to the Foreclosure Abuse Prevention Act.”
The important thing about the new law is that it established the glide path for homeowners to recover their property and prevent foreclosure when the critical steps required for foreclosure are missing. Despite all of the public relations efforts by the banks to characterize transactions with homeowners as “mortgage loans,” add to characterize their efforts to invoke alleged rights to enforce or foreclose, s.more and more people are finally getting the message: it is entirely possible that the homeowners do not owe any money to the lawyers or the servicers that are claiming it. It is further entirely possible that no legal creditor exists
Here is the article by Robert M. Link, a partner at David A Gallo & Associates.
Foreclosure Abuse Protection Act Requires New Approach
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A discussion of what next steps lenders should take in response to the Foreclosure Abuse Prevention Act.
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On one hand, the Foreclosure Abuse Prevention Act (A7737B), recently signed into law by Governor Kathy Hochul, is transformative legislation which may cause the dismissal of thousands of pending foreclosures with prejudice over technicalities such as a failure to send a proper default notice. On the other hand, at least prospectively, the fever-pitched panic from mortgage lenders, while understandable, may be premature.
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The Foreclosure Abuse Prevention Act (FAPA) amends six current laws [CPLR §203, CPLR §205, CPLR §213, CPLR §3217, RPAPL §1301, and GOL §17-105] and adds CPLR §205-a. To the delight of court administrators, the changes will cause the permanent dismissal of thousands of foreclosures which have congested the civil docket over the past decade.
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These cases are generally fraught with evidentiary problems related to mortgage servicer transfers (See, e.g., HSCBC Mortg. Services, Inc. v. Royal, 142 A.D.3d 952 (2d Dept. 2016) (reversal where the affidavit from “the loan servicer for the plaintiff’s successor in interest” included inadmissible hearsay); failure to promptly move for default judgment (See, e.g., HSBC Mortgage Corporation v. Hasan, 186 A.D.3d 1495 (2d Dept. 2020) (reversal to dismiss foreclosure pursuant to CPLR 3215(c) where “plaintiff’s purported order of reference bears…no notation of having ever been filed….” and thus, “failed to adequately establish that the plaintiff ever actually took proceedings within one year after the default”); or the inclusion of gratuitous consumer protection disclaimers in the footer of the RPAPL §1304 notice (See, e.g., Bank of America, N.A. v. Kessler, 202 A.D.3d 10 (2d Dept. 2021) (foreclosure dismissed because the RPAPL §1304 notice “included other information in two notices pertaining to the rights of a debtor in bankruptcy and in military service”), rev’d, 2023 WL 1972994 (N.Y. 2023).
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The foreclosure statute of limitation triggers legal consternation among practitioners because mortgages are generally installment loans with payments due monthly. As such, the entire debt only becomes time-barred six years after the final installment payment is due, possibly decades in the future. However, when the lender “accelerates” the mortgage debt at the commencement of the foreclosure lawsuit (meaning the entirety of the balance is made due and owing at once), the plaintiff faces a second, and more sobering, deadline for statute of limitations purposes.
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Should counsel discover an insurmountable defect too late in the case, plaintiff may find itself in the unenviable position of prosecuting a foreclosure likely to be dismissed. FAPA creates an anomaly in the law that otherwise holds the discontinuance revokes the complaint and anything which occurred in the lawsuit. See, e.g., Newman v. Newman, 25 A.D.2d 353 (2d Dept. 2007) (“it is as if it had never been; everything done in the action is annulled and all . . . order[s] in the case are nullified”). FAPA’s amendments to CPLR §203 and CPLR §3217 provide, once the mortgage is accelerated, “no party may, in form or effect, unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law…”
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The most significant provision of FAPA removes foreclosures from “savings statute” protections otherwise afforded to civil cases and enacts a narrow substitute. The new CPLR §205-a permits the unsuccessful mortgage lender a second, but never a third, bite at the apple. Moreover, the new statute imposes a zero-tolerance policy for the lender’s delay, including for a single non-appearance at a calendar call (See, e.g., Uniform Civil Rules for the Supreme and County Courts §202.27(b). Also, CPLR §205-a does not permit a recommencement by the mortgagee’s assignee (See, CPLR §205-a (1)).
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The result, fair or not, is the foreclosure defendant (not infrequently, a real estate investor who pried the deed away from the homeowner) may be awarded a free house. See, e.g., Sharova v. Wells Fargo Bank, National Association as Trustee for Structured Adjustable Rate Mortgage Loan Trust, 2019 N.Y. Slip Op. 29001 (Sup. Ct. Kings Co. 2019) (mortgagor’s motion for declaratory judgment discharging the mortgage granted notwithstanding allegations “that plaintiff seeks a ““windfall in the form of a free house.” This may be true, but it is not for this court to create the law, but only to follow it.”)
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The doomsday scenario for lenders may be avoided by accelerating the loan balance at judgment instead of at commencement. This option may not be available where the mortgage does not include a broad acceleration clause (e.g., “the whole of said principal sum and interest shall become due at the option of the mortgagee after default in the payment of any installment…”). Considering FAPA’s consequences, lenders would be prudent to revisit their mortgage template to grant broad discretion to accelerate the debt with the entry of judgment.
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The Appellate Division, Second Department, in Goldman v. Nationstar Mortgage, LLC., reaffirmed longstanding precedent that commencement of the foreclosure does not accelerate the mortgage absent unequivocal language making the election. See, Goldman, 205 A.D.3d 1008 (2d Dept. 2022) (The complaint in the foreclosure action, filed more than four months after the date of the purported modification agreement, neither acknowledged the purported modification agreement nor alleged to accelerate the modified loan, “which had materially distinct terms”) [Emphasis Added], citing Freedom Mtge. Corp. v. Engel, 37 N.Y.3d 1 (2021).
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The lender’s failure to accelerate in Goldman contrasts with the facts in Bank of New York Mellon v. Dieudonne. See Id, 171 A.D.3d 34 (2d Dept. 2019). In Dieudonne, Plaintiff fatally alleged in its complaint that it accelerated the mortgage. Plaintiff subsequently changed course, out of convenience and in response to a statute of limitations defense. Plaintiff then argued it “lacked the authority” to accelerate with the complaint because same mortgage permitted the borrower to cure the default by tendering past due payments (as opposed to paying the full accelerated balance). [Emphasis added] See, Id.
Dieudonne stands for the narrow holding that a mortgage reinstatement provision does not preclude the lender from accelerating the mortgage with the complaint. The Second Department did not hold a foreclosing lender must accelerate the balance of the loan with the complaint. The lender may make its election as the contract authorizes or even consider a partial foreclosure for the instalment payments. See, e.g., Duetsche Bank Trust v. Crimi, 184 A.D.3d 707 (2d Dept. 2022) (“compliance with the conditions of acceleration contained in paragraph 22 of the subject mortgage [was] not a condition precedent to commencing [so much of this] foreclosure action [seeking recovery of] unpaid amounts that have already become due under the terms of the note and mortgage.”).
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In fact, courts have consistently held “some affirmative action must be taken evidencing the holder’s election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation[.]” [Emphasis added], See, Dieudonne, citing Bergman on New York Mortgage Foreclosures § 4.02.
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The Second Department’s holding in Dieudonne could have been reached solely on estoppel grounds. It is broadly accepted that “policies underlying preclusion of inconsistent positions are general considerations of the orderly administration of justice and regard for the dignity of judicial proceedings[.]” J & JT Holding Corp. v. Deutsche Bank National Trust Company, 173 A.D.3d 704 (2d Dept. 2019) citing Piedra v. Vanover, 174 A.D.2d at 197, (2d Dept. 1992).
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In sum, the lender must unequivocally announce its intention, one way or another, to declare the accelerated balance due and owing upon the occurrence of a specific event. See, e.g., Engel, 37 N.Y.3d at 19 (2021) (“a noteholder must effect an “unequivocal act” to accomplish such a substantial change in the parties’ contractual relationship.”).
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Given New York’s extensive foreclosure timeline, and the likelihood for fiercely contested litigation, the lender should consider postponing its election to accelerate until the entry of judgment. This is the most prudent course of action considering the stakes; but also, appropriately respects the borrower’s customary right to cure by tendering past due installment payments during the foreclosure.
Robert M. Link is a partner at David A Gallo & Associates.
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